Don’t Rule Out an Asia Banking Crisis, S&P Says

Asia came through the global financial crisis relatively unscathed and has been pacing world growth for the last decade. But it could be the next world hot spot for a banking crisis.

Standard & Poor’s Ratings Services warned Thursday of a threat to the region’s financial stability from a credit and debt bubble in China. In a downbeat look at Asia’s banking system, the ratings firm said slower economic growth in China could fuel a spike in bad loans even as the shadow banking sector continues to expand.

“A regional banking crisis isn’t out of the question,” S&P said in its report.

Much of S&P’s concern stems from the off-balance sheet lending by China’s banks—known as shadow banking—that goes unmonitored by regulators.

“Years of very rapid credit expansion on- and off-balance-sheet, along with a strong increase in housing prices, is set to backfire on banks’ asset quality, profitability, and possibly liquidity,” S&P said.

Warnings on China’s banking system aren’t new. Ratings firms, analysts and the International Monetary Fund have previously flagged the same risks. And S&P itself acknowledges that its base case remains that Beijing would bail out the finance sector in an emergency.

But the direct language used by S&P is a reminder of the threat that China’s banking sector, the world’s largest, poses to the region.